Price tops USD 20

July 30, 1999, 16:30 CEST

The price of Brent Blend - the North Sea reference crude - topped USD 20 per barrel on 29 July, its highest level since the autumn of 1997.

This price rise is primarily due to the fact that members of the Organisation of Petroleum Exporting Countries (Opec) have observed their agreement to cut production, says Tor Kartevold, market analysis manager in Industry & Trading.

That has led to a marked reduction in overall global stocks of crude, he explains.

Fresh estimates for 1999 show that the world is set to consume 75.1 million barrels of oil per day on average, while overall daily supplies are expected to be no more than 73.9 million barrels.

This will yield a reduction in global oil stocks of roughly 1.1-1.2 million barrels.

The trend last year was the reverse, with an increase in stocks of around a million barrels as the main reason why crude prices fell to below USD 10 per barrel.

Commercial stocks of crude, petrol, diesel oil and light heating oil in the USA, Europe and Japan have a key impact on price-setting in the market.

Compared with February 1998, the Opec countries have cut production by 2.4 million barrels of oil per day. These reductions are the main reason for the contraction in stocks.

The organisation is currently delivering about 26 million barrels to the world market every day.

"I would argue that the Opec cuts agreed in March, combined with previous reductions in 1998, represent one of the best accords in the organisation's 40-year history," says Mr Kartevold.

"The cut-backs have been maintained because of broad support from key members such as Saudi Arabia, Venezuela and Iran."

He adds that prices are currently very sensitive to the moves being made by major players in the paper market through purchase and sale of futures on the world's oil exchanges.

"These players change their positions quickly, so that the price outlook for the next few weeks is unstable."

Other less important factors influencing the market at present include a strengthening of US petrol sales, while unrest in Nigeria has prompted delays to crude shipments.

"We can still expect to see prices on a roller-coaster," Mr Kartevold observes in a comment on the outlook for prices in coming months. "These fluctuations are likely to occur along a rising trend towards the Opec meeting in the last half of September."

Despite the improvement in prices, Statoil executive vice president Terje Vareberg has emphasised on several occasions this spring and summer that the group will continue seeking efficiency gains.

These efforts aim to safeguard the profitability of projects at oil prices as low as USD 12 per barrel.

"It's no consolation that oil prices are now significantly higher than when I announced in February that we had to make substantial savings and workforce cuts in the order of 1,500 work/years," chief executive Harald Norvik commented earlier this month.

"Oil prices can fall again. So it's crucial that we can live reasonably well with lower raw material prices. Quite regardless of what these are at any given time, however, our costs are still too high and we've got to do something about that.

"We need a cultural change in the group on the question of how we spend our money."